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In The Pipeline
With President Bush beating the "Ownership Society" drums, the blogosphere has been abuzz with talk about Social Security reform, and particularly with private accounts. These would work by taking some small portion of the current payroll taxes and channeling them into individual accounts. I want to discuss two aspects of this basic scheme: (1) it is forced savings, and (2) the economic effect.
Start here for links to thinkers from many different ideological backgrounds.
I don't like forced savings. The government doesn't know when or how much I should save. But I grant that it's an obvious partial solution to the moral hazard created by a safety net. What's interesting here is that the "forced" part already exists, in the form of payroll taxes. The argument isn't about introducing force, but about changing the force that's already there.
I'm already a voracious saver — one-third of my gross income — so my pattern of savings won't be much affected by the proposed changes to Social Security. I hope this distance makes me more objective.
Today, I pay my payroll taxes and I never see the money again. I don't expect to get anything back from the Social Security system when I retire. If it exists at all by then, it will be means-tested, and I will be too wealthy to qualify. Yes, it will punish everyone who saved responsibly, and will be a windfall for the irresponsible. I'll pay into it for my entire working life and never get a penny back. People who favor Social Security owe me an explanation for this blatant robbery.
Forced savings into an individually owned account would be an improvement over the existing system because I would then get some of my own money back, instead of none of it. That's all there is to it. (The "transition costs" argument is bogus; there's no net cost at all, but the government would have to start borrowing sooner rather than later.)
I would rather not be forced to save. I would love to opt out of Social Security, and so would lots of other people my age. I wonder if our representatives in Congress are listening…
A federalist direction would also be welcome. Why should Social Security be a national program, instead of allowing different states to experiment with different systems? If a safety net is politically necessary, let's at least allow different kinds to be tried.
I do not promote the argument that Social Security privatization is desirable because of the higher rate of return in the stock market versus government bonds. Don Lloyd exposes some of what's wrong with that argument (though I would quibble a bit with his examples).
So long as a Social Security surplus exists, investment in the stock market could be a benefit. Government spending is consumption spending, and consumption spending doesn't grow the economy. If the surplus were invested in the capital markets it would increase productive spending, either by existing or new businesses, and this would grow the economy.
It's important to see that the benefit here is due to a reduction of overall government spending. If the government would respond to the unavailability of some of the former surplus by borrowing more instead of spending less, it would be a wash. The opportunity for benefit also disappears when Social Security goes into deficit, because then the government would surely borrow.
Would the infusion of funds into the stock market cause a speculative bubble or a business cycle? No, and no. The capital market infusion from private accounts would be counteracted by increased government borrowing. There would be no net economic effect. Only in the unlikely case of a reduction in overall government spending would there be one, and it would be a benefit.
My greatest fear in private accounts would be the limitations imposed by the government on what investment vehicles are acceptable. If the options were too narrow, that could create a bubble, but I think that is unlikely. More serious would be the enormous voting power of the managers of the funds approved for private accounts. For this reason it is very important to have many options, and to be able to invest outside of mutual funds. (I expect to be disappointed on this matter.)
Somewhat relatedly, it's worth stating my profound opposition to any Social Security reform that would make government the owner of stocks. The government absolutely must not have voting power over shares. That way lies fascism, and CalPERS has already started throwing its weight around.